It is being reported that Greece is nearing a long-delayed deal on its debt, and in this deal bondholders could see losses of 70%. Another EU member, Portugal, is next in line as it relates to debt fears. In the past week, Portuguese’ sovereign debt / government bonds were yielding over 21% and 16% for two and ten-year, respectively. So it is obvious that these fears are not unfounded, and EU members are becoming even more tightly intertwined economically and politically in their attempts to address these problems long-term.

The situation is becoming dire, and Ian Cheshire’s CEO of the U.K.-based Kingfisher PLC, the world’s third-largest home-improvement group, noted in the Wall Street Journal this week that it has come to the point that EU leaders / politicians need to fix Europe or else!

Here at home, some of the worst performing sectors in 2011 were financial stocks and they have been the leaders this year. That being said, many banks, especially large ones, still face a myriad of issues as well as potential penalties and new taxes that will impact their income. In addition, it appears that in the last quarter, S&P 500 firms saw revenues rise at a much better pace than profit margins. This may be the result of costs going up faster than sales, which can hurt profits and can take the wind out of a market rally.

Bottom line, it’s an election year, the Fed is committed to keep rates low, and the Super Bowl indicator says that if the NY Giants win on Sunday, it will be a positive year for investors. Sorry Patriots’ fans, historically, each of these events have been positive indicators for the market. Thus, I won’t be upset if the Giants win. With that in mind, I expect at some point we’ll get some nugget of negative news that will bring back volatility (especially if we see debt ceiling battles on Capitol Hill) and declines in stock prices, however, the overall trend for the year seems positive.

Insightful thoughts 

Stocks are an imperfect asset, superior only to every other investment over long periods.

            Knight Kiplinger, Kiplinger’s Personal Finance, December 2011

Nietzsche famously said “What does not kill me makes me stronger.” The corollary is “What constantly rescues me makes me weaker.” The world will only stop looking for bailouts when policy makers stop handing them out.

            John Hussman, Hussmanfunds.com, December 5, 2011

Many European companies are in better shape than the nations in which they’re based.

            James H. Glassman, Kiplinger’s Magazine, December 2011

The U.S. and the developed world have permanently slowed in their GDP growth. This is mostly the result of slowing population growth, an aging profile, and an over commitment to the old, which leaves inadequate resources for growth. Also contributing to the slowdown, particularly in the U.S. and the U.K., is inadequate long term savings. As I write, the U.S. personal savings rate has fallen once again below 4%.

            Jeremy Grantham, GMO Quarterly Letter, December 2011

China may become an economic powerhouse, but they still have a lot of growing up / maturing to do 

The following are excerpts from the 1/30/2012 Wall Street Journal:

For generations, Chinese men looking for a dose of vigor have sworn by a traditional remedy: fungus harvested from dead caterpillars, known in some quarters these days as Himalayan Viagra.

Now Chinese investors are using the rare fungus to try to boost something else—their investment returns. The fungus has doubled in price over the past two years and the top grade now fetches more than $11,500 a pound, according to Fuzhou-based brokerage firm Industrial Securities. In the same vein, Baijiu liquor of uncertain vintage sold for $8,300 at a December auction.

With Chinese stocks falling, real-estate markets flat and bank deposits offering measly returns, Chinese investors have been looking for help in strange places. Besides traditional medicinal products, they are plowing money into art-based stock markets, homegrown liquors, mahogany furniture and jade, among other decidedly non-Western asset classes.

Newfangled exchanges are sprouting across China to take advantage of the excitement. Nanjing Pharmaceutical Co. set up an exchange last year for trading traditional medicines such as deer antler. In November it extended hours so investors could trade when they get home from work. “Expanding the hours gives investors more time to make a profit,” the exchange said on its website.

I am sure this type of speculation is not representative of all Chinese investors; however, it does show that the Chinese are human beings, who have become disheartened with traditional investments and can be lured into crazy schemes to make money. Unfortunately, I can assure you that whether it be dead caterpillar fungus  or homegrown liquors, these investors will eventually see massive losses and PT Barnum’s belief that “there is a sucker born every minute!” is alive and well today in China. 

Quotes

“A second reason why science cannot replace judgment is the behavior of financial markets.”

                        Martin Feldstein, economist

“A clever person solves a problem. A wise person avoids it.”

                        Albert Einstein, scientist

“Democracy is the worst form of government, except for all those other forms that have been tried from time to time.”

                         Winston Churchill, statesman

“There are two levers for moving men – interest and fear.”

                        Napoleon Bonaparte, military and political leader

Tony Moeller, CPA
Integrity Investment Advisors 
12721 Metcalf, #202 
Overland Park, KS 66213 
tmoeller@iia-kc.com
913-897-2074 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets.  

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

• The U.S. Labor Department announced this week that food and energy costs pushed down U.S. wholesale prices (the producer-price index, which measures what manufacturers and wholesalers pay for finished goods) in December, providing some relief for businesses hit by higher costs of other goods. In addition, there was a 0.4% rise in industrial production in December reflecting strength in manufacturing.
• Another positive is an article in today’s Wall Street Journal that spending on home maintenance by homeowners and landlords is forecasted to have increased in 2011 and will go up again in 2012. That would market the first year since 2006 that this has occurred.
• Right or wrong, the Federal Reserve appears to be ready to put additional steps in place to increase monetary easing in the upcoming months depending on several economic scenarios. As controversial as these steps have been, the stock market has reacted positively each time.
• Locally, I attended a bank advisory board meeting last evening. In attendance were several business owners of firms of various sizes. It was nice to hear one professional with a manufacturing firm state that his company is starting to see a pick up in orders. His customers are replenishing their inventory or are more confident about sales in the coming months.

In this same meeting, a local attorney, well-versed in mergers and acquisitions, stated that he has seen an increase in activity. And the bankers themselves had some positive comments regarding loan demand.

All in all, it was insightful to hear professionals from various industries acknowledge some positive signs in the economy. Trust me, no one was breaking out the champagne, but I got the feeling that the consensus view was tilting toward the glass is half full, as it relates to the U.S. economy. 

The other side of the coin

In addition to these positive items, the stock market, and in particular financial (i.e., bank) stocks are performing better. Many analysts have the opinion that for the U.S. economy and stock market to recover long-term, it is necessary for the banking sector to perform better, getter healthier and back to the business of lending money. Improving corporate profits are a necessity as well. That being said, there is some concern about the market’s recent strength and the underlying companies’ earnings. 

S&P 500 companies have already issued more profit warnings ahead of this reporting season than at any time since the fourth quarter of 2008. Yes, it is early in the reporting season, and investors remain optimistic and prefer to focus on positive economic signals instead of Europe’s debt crisis. 

Stocks have burst out of the gates in 2012, surprising investors and pundits alike with the S&P 500 having its strongest start of the year in a quarter century. But the strong pace hasn’t persuaded the skeptics that the rally has legs. The bears point to a number of issues lurking ahead, ranging from corporate earnings to technical signposts that are used to predict the stock market’s direction.

Among investors’ chief concerns: Companies are reporting disappointing profits for the first time in years. Also, some analysts said some indicators are flashing gloomy signals. And a barometer of shipping demand, the Baltic Dry Index, has plunged in recent days, sparking worries that overall economic activity may be stalling.

Bottom line, there seems to be a more positive mood regarding the economy and stock market, even though we are seeing some mixed signals.

Reversal of fortune overseas 

International stocks took it on the chin last year, but are bouncing back smartly. However, emerging countries are benefiting from of the problems facing Europe. Developing countries like Indonesia and Brazil are seeing their borrowing costs drop to record lows. This is a reevaluation of sovereign debt risk where emerging countries are considered more creditworthy and able to issue bonds at record low interest rates and in many cases below what comparable bonds would be for developed countries like Spain and France. As such, companies in these countries should benefit from the lower interest rates, and that can boost their stock prices as well.

The International Monetary Fund and European Central Bank are doing what they can to make sure that European banks have ample liquidity to make loans and carry on their business as usual. Even though a recession is expected in Europe this year, many economists believe it will not carryover to other countries. Thus, as previously noted, European stocks have performed well thus far in 2012, and the Stoxx Europe 600 index is trading at 10.2 times next year’s earnings, which is well below the 13 times long-run average.

The economic storms in Europe are probably not completely over, but there are some rays of sunshine through the clouds and investors are reacting positively to them.

Quotes 

“Intelligence plus character – that is the goal of true education.”

                        Martin Luther King, clergyman and civil rights leader 

“Life is not a problem to be solved, but a reality to be experienced.”

                        Soren Kirkegaard, philosopher and theologian 

“The noblest treasure is the joy of understanding.”

                        Leonardi da Vinci, artist, inventor, etc. 

Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
 
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets. 

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

It’s the start of a new year and the best part of it has been the weather. It’s been in the 60s (degrees that is), which is extraordinarily balmy for the KC Metro area in January. 

Regarding the investment and economic climate, well that forecast is cloudier. It appears that optimism is trying to shine through in 2012. Unemployment is trending down and jobs are being created, even though both are lagging on a historical basis. 

On the other hand, this week, Alcoa, the world’s biggest aluminum company, announced that it is cutting its capacity by 12% due to economic slowdown and uncertainty around the globe. In addition, the Wall Street Journal reported that retail sales during the Christmas season were less robust than expected, and some analysts are forecasting less sluggish earnings in 2012 for companies in the S&P 500. 

Pimco CEO, co-CIO, and fund manager,  Dr. Mohamed El-Erian told CNBC today that the problems in Europe still overshadow any good news domestically.

Three worries trouble the markets, he said:

1) Growth is being driven by an unsustainable drop in the national savings rate.

2) Europe is still dangerous, even though the headline risk has abated in recent weeks.

3) The desire to shed debt will continue to hold back growth. 

All in all, the first several months of 2012 may be a continuation of 2011. However, one thing is for certain, for the next 10 months, be prepared to be overwhelmed by political ads, and especially some of the most negative and slanderous seen in decades or ever. This may sound extreme and having no connection to your investments, but that’s not true. 

I believe all investors (i.e., individual, institutions, large, small, young or older) need to take a deep breath. Otherwise, the negative rhetoric, regardless of the politician or party originating it, may result in you emotionally reacting and making very short-term and unwise investment decisions. My best advice is that when it comes to politics or investing, you need to develop a thick skin. 

We should stand by our beliefs, make economic and investment choices that match our beliefs and specific situations in life and then follow through with whatever game plan or strategy we put in place.  Making economic, investment or lifestyle decisions based upon campaign ads, political debates or poll standings is ludicrous and a recipe for disaster. Voters are fickle and political polls change more frequently than the scores in the recent bowl games. 

I can guarantee you; Bill Self does not change his playbook or starting rotation, McDonald’s does not change its menu, Apple does not adjust the features on the upcoming i-Phone and Proctor and Gamble does not reformulate Crest toothpaste or Duracell batteries based upon which politician or candidate said what or how they are polling. The coach and the three companies previously mentioned have all had great long-term success by committing to a plan/strategy, staying focused on what they can control and not wasting their time, energy and resources on what they can’t. That being said, I sincerely hope the same can be said for investors. I’ve heard it said countless times, activity does not equal to productivity or profits. Thus moving money around, for whatever emotional reasons, may feel good at the moment, but rarely has positive results. 

Quotes 

“Flaming enthusiasm, backed up by horse sense and persistence, is the quality that most frequently makes for success.” 

                        Dale Carnegie, self-improvement lecturer and author 

“Measure yourself by your best moments, not by your worst.  We are too prone to judge ourselves by our moments of despondency and depression.”

                        Robert Johnson, entrepreneur 

“Years teach us more than books.”

                        Berthold Auerbach, German poet 

“Chance generally favors the prudent.”

                        Joseph Joubert, French moralist and essayist

Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets. 

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

Year-to-date, as of the market close yesterday, the combined average of the Dow Jones Industrials, S&P 500 and NASDAQ was down 1.933%.  This compares quite favorably to the Dow Jones Global Index, which is comprised of 50 countries (including the U.S), being down 12.90%, and the Dow Jones Global Index-ex U.S. (excluding the U.S.) down 18.9%, for the same time period. 

Another example of how the U.S. is not experiencing the same market traumas as other countries would be yesterday’s bond auctions.  The five-year Italian government bonds were issued at 6.47%, while 30-year U.S. government bonds were issued at 2.89%.  To put this into perspective, a 30-year $150,000 mortgage at the previously mentioned Italian bond rate would result in a monthly payment of $945.10 versus $623.50 at the U.S. rate.  Now you can see why high interest rates are crushing European governments’ finances, especially when they have to refinance hundreds of billions, if not trillions of debt each year.

To say that we in the U.S. have been sheltered from what is occurring in other parts of the world is an understatement.  Also, it is an omen of what fiscal steps we need to take here in the U.S. to avoid the same predicament. 

Is my glass half full or half empty? 

2011 has been an emotionally laden, financial rollercoaster no matter how you look at it.  During this year, financial successes or setbacks often took at backseat to other events for many clients’, friends’ and family members’ lives who encountered the loss of a loved one, an illness, etc.  Life is often not picture perfect on a daily basis, and it is ever-changing and cannot be taken for granted.   

As such, 2011 has been a very mixed year of setbacks and blessings.  When it comes to setbacks, it hurts when Toan, Sally or I see you impacted by financial setbacks, an illness or injury, struggling with a wayward child, been laid off, etc..  In no way do I want to make light of what some of you have or are enduring.  However, at this point, I would rather reflect on the blessings.  Everyone at the firm truly enjoys hearing about the blessings occurring in your lives, and it lifts our spirits when you share them with us.

Along these lines, I have been blessed with a great family, devoted associates, a solid mix of clients and friends, who I feel privileged to be a part of their lives.  Also to have an extended network of competent and caring professionals (i.e., CPAs, accountants, attorneys, contractors, etc), and resources available allows us the ability to tap into their wisdom and provide the tools to help us be your advocate.

When we hear about the various events in clients’ lives, we are reminded that our core purposes are:

• To inspire, educate and empower you to achieve your lifetime goals. 
• Be your financial advocate during your inevitable lifetime transitions. 
• Build a strong, enduring firm whose legacy is to make a positive impact on those individuals’ lives we touch.

Based upon my 24 + years in this industry, I can honestly say that I love my job, because it involves people (i.e., you) who I value and care about.  Also, you allow me to be myself.  I would be sick if I had to wear a suit and tie to work every day and spend the majority of my time talking market statistics to try to impress you, while a big screen TV displays CNBC in the background, versus getting to know you personally. 

Bottom line, everyone at IIA is your advocate and will treat you and your family with integrity and respect, and in the same manner we would members of our own families, except of course for crazy Uncle Ernie.

Look, this is not a commercial, and I am not trying to blow smoke at anyone.  I just look back over the past year with all the events happening domestically and globally and realize how my life has been enhanced through being involved with you.  Personally, I’ve had several hospital visits this year for my son and relatives and thankfully everyone is doing well.  However, it really hit me on the day after Thanksgiving, when Luke, my middle child, broke his arm falling from a tree in the backyard, while helping us hang Christmas lights. 

Believe me when I tell you, it was not a pretty break.  We went to two hospitals, incurred an overnight stay and Luke underwent surgery, all within a 24-hour period.   However, he is in a cast and recovering nicely.  Look, I’ve had fractured bones, a dislocated knee and subsequent surgeries, but that all pales in comparison to the feeling of shock and horror I experienced seeing my son injured.  On the flip side of the coin, I also experienced an unbelievable sense of appreciation and thankfulness for the medical care he received.  I must admit, that as a flawed human, it took others caring for my child to make me truly thankful and appreciate all that I have in life.

As a result, I want to say thank you for allowing me, Toan and Sally be a part of your lives.  During the course of the year, we are impacted by the events that occur in your life.  As such, we look forward to hearing more stories about the trips you’ve taken, the accomplishments of your kids, the crazy things your grandkids have said or done, the charities you’re involved in, and the little things in life that make your day. 

This holiday season, thanks for sharing your life stories and let us know if there is anything we can do for you.

Happy Holidays!

Quotes 

“I once bought my kids a set of batteries for Christmas with a note on it saying: ‘Toys not included.’” 
                           Bernard Manning, comedian

“Mail your packages early so the post office can lose them in time for Christmas”
                          Johnny Carson, entertainer 

“Anyone who believes that men are the equal of women has never seen a man trying to wrap a Christmas present.” 
                         Unknown

“In the old days, it was not called the Holiday Season; the Christians called it “Christmas” and went to church; the Jews called it “Hanukkah” and went to synagogue; the atheists went to parties and drank.  People passing each other on the street would say “Merry Christmas!” or “Happy Hanukkah!” or (to the atheists) “Look out for the wall!”
                        Dave Barry, columnist

Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets. 

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

• Central banks around the globe announced a coordinated plan to make dollar funding cheaper for European banks (i.e., they are giving European banks much needed liquidity and at a very reduced rate).
• There were separate reports this regarding the unemployment rate in the U.S., which indicated it may be declining.  This is great news; however, part of this decline is due to fewer people looking for jobs (i.e., they have just given up).
• In addition, the European Central Bank and our Federal Reserve have both pledged additional steps if needed to stabilize world financial markets.  Many here in the U.S. are predicting the Fed will implement another quantitative easing (i.e.,QE3), which potentially would have a positive impact on the stock market and economy.
• China indicated it would loosen monetary policy by lowering the reserve requirement ratio for banks to boost its slowing economy (i.e., they are putting measures in place to encourage banks to loan money). 

There are two sides to above story 

Various central banks around the globe, including our Federal Reserve, came together to provide liquidity to European banks that are suffering as a result of European Union nations’ debt problems, and the losses they have already incurred or will be taking from various EU nations defaulting on a portion of their debts.

The coordinated central banks’ move ignited the global stock markets on Wednesday.  However, the other side of the story is the fact that the situation in Europe was so dire that it required numerous countries, and their respective central banks, to step in to stabilize the situation.  In addition, both the European Central Bank (ECB) and our own Federal Reserve have made recent statements that they are each prepared to take additional steps to keep Europe’s and our own financial systems functioning.

Basically, Europe’s economic crisis has been stabilized for the moment, and that news was a godsend for global stock markets.  However, the patient (Europe) is still not out of ICU and it will be quite a while before this patient can leave the hospital. 

Also, we must not forget that Europe is not the only patient in need of economic rehab.  We still have high unemployment here at home, China has seen a slowdown in its economy, and global economic growth estimates have been reduced by various monitoring groups.  However, at least many world leaders are taking note of all this and beginning to take some corrective action in the meantime.

Some record events took place recently 

The holiday season appears to be getting off to a good start this year with record breaking Black Friday and Cyber Monday sales.  Early reports by big American retailers on yesterday showed November sales were better than expected.  Shoppers appeared to shrug off economic worries, giving a big lift-off to the holiday shopping season.  Five of the six retailers tracked by Thomson Reuters have reported November sales so far have beaten expectations. 

Another record event took place in 2011, when the U.S. became a net exporter of gasoline, diesel and oil-based fluid for the first time in 62 years.  The figures illustrate the impact of the significant increase in domestic production thanks to new sources of oil coming from North Dakota and Texas.  North Dakota’s oil production of 424,000 barrels per day in July was up 86% over the same period in 2009.  Growing domestic output means refineries in the U.S. are making more fuel than the local market needs.  That has given those on the U.S. Gulf Coast added incentive to look for customers abroad. 

Also adding to the U.S. exporting firepower: Refineries are more efficient, giving them an edge over older facilities in Europe.  New drilling methods are boosting U.S. oil production, helping ensure steady supplies of raw material for refiners to process. 

Currently, we are still dependent on foreign oil.  However, the dramatic increase in oil and natural gas exploration, along with a decline in energy demand due to a much more benign economy, has combined to make us, the U.S., more self sufficient when it comes to our energy needs, and this trend could continue in the years to come. 

Stocks are Extremely Attractive 

Jeremy Siegel is a Professor of Finance at the Wharton School of the University of Pennsylvania, and in my opinion, one of the top market stock historians of all time.  Attached is a link to an interview with Professor Siegel published in the 11/29/2011 Advisor Perspectives newsletter. 

I will not go into too great of detail, because I don’t want to misinterpret his comments or analysis.  However, he basically states several factors on why he believes U.S. stocks are extremely attractive currently. 

I find his analysis positive, insightful and a rational counter argument to much of the negativity swirling in the news.  Does this mean that it’s time to go hog wild and put 100% of everyone’s funds in stocks?  No, but it does give some reassuring and sensible arguments on why the stock market may not be as scary as many pundits make it out to be.  That being said, the huge rally in the stock market over the last week is nice to see, but it may be somewhat overblown.  Part of the rally could be a reaction to some positive economic news and another factor could be that some short sellers (i.e. investors betting on the stock market declining) actually had to buy stocks to cover recent losses.  In addition, the volume of stock trading has been somewhat light, on a historical basis, when compared to past bull markets.  As such, I don’t think we are going to continue to see more meteoric jumps in the market for a prolonged period in the near term.  Regardless, I highly recommend you take a moment to read his comments, especially those of you who think stocks are too risky and bonds are a much better option at this time. 

http://advisorperspectives.com/newsletters11/pdfs/Jeremy_Siegel_on_Why_Stocks_are_Extremely_Attractive.pdf 

The dragon is becoming tame  

China’s factory sector shrank in November for the first time in nearly three years, an official purchasing managers’ index (PMI) showed this week.  This validates China’s central bank move to cut the reserve requirement ratio for its commercial lenders on Wednesday, for the first time in nearly three years to ease credit strains and shore up an economy running at its weakest pace since 2009. 

In addition, China’s once red-hot real estate sector is slowing down as home prices and sales fall.  China’s economy appears to be slowing down and its leaders are taking steps to try and avoid a hard economic landing (i.e., recession).  To see why China is taking these steps, just look at the following picture, from today’s Wall Street Journal, of a residential construction project in Inner Mongolia, China, that now sits idle due to falling real estate prices and sales.

The end of the world has been postponed! 

A German archeologist announced recently that the translation of the Mayan calendar previously predicting the world ending in 2012 is incorrect.  In his opinion, prior translators got the message wrong, and 2012 is not the end of the world, but the beginning of a new era, especially since 13 is considered a sacred number by Mayans.  I am sure this has been a major concern for many of you, so I wanted to be sure and share this update with you. 

Quotes 

“Courage is the power to let go of the familiar.”

            Raymond Lundquist 

“A positive attitude may not solve every problem, but it makes solving any problems a more pleasant experience.”

            Grant Fairley, executive coach 

“You are born with three things: intelligence, endurance, and the opportunity to build integrity.  You decide how much intelligence and endurance you are going to use.  You build integrity every single day with the choices you make.”

            Bob Kerrey, veteran and statesman 

Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets. 

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

http://iia-kc.com/blog/media/video_commentary_111811/

Europe continues to have budget problems and concerns regarding all current members remaining in the European Union, and the potential impact on global economies and stock and bond markets is not subsiding. 

Europe is increasingly serving as a counter weight to a growing stream of better U.S. economic news which are:   

• The Labor Department said yesterday that new unemployment claims fell to 388,000 last week, the fewest since April. The four-week moving average, which evens out short-term changes, was the lowest in seven months. 
• Wednesday it was reported that consumer prices fell for the first time in four months.  Also, industrial production was up 0.7 percent, its largest gain since July, and the National Association of Home Builders sentiment rose to its highest level in 18 months. 
• Corporate profits continue be strong and their cash coffers are bulging at over $2 trillion dollars.  

As it relates to all these events, a global currency strategist at RBS stated, “Financial conditions are strained but nowhere near crisis levels that we’d seen even earlier this year…We had greater strains earlier this year and nowhere near the extremes of late 2008….There are headwinds.  There are challenges here… The U.S. data is definitely looking better.  You have this dichotomy of financial conditions getting strained and economic conditions getting better.  The question everyone is trying to deal with is do the harder financial conditions short circuit any improvement in economic conditions.  The jury is out because the financial conditions strain is not that serious.” 

Fitch, a rating agency, in a note released in the final hour of trading yesterday, said unless the euro zone debt crisis is resolved in a timely and orderly manner, the credit outlook for the U.S. banking industry could worsen.  It said banks have manageable direct exposure to stressed European markets but further contagion risks exist. 

Finally, the markets are also reacting to reports from Washington on hang ups in the Congressional “super committee,” which is fast approaching its Nov. 23 deadline to find $1.5 trillion in deficit reductions over a 10-year period.  Wall Street expectations are low that the committee will be able to agree to the full amount of required reductions. 

What does it all mean? 

Over the last several weeks I have met with several mutual fund representatives.  The combination of what they shared with me regarding their respective funds managers’ investment outlooks and strategies, combined with what I’ve read and heard, makes me believe that yes the U.S. economy is improving.  However, our economic, stock and bond markets’ fates are being controlled by what is occurring in Europe and the Congressional “super committee” negotiations in the near term.  As such, in either case Europe and Congress will find long-term and painful solutions that actually address and resolve the economic issues at hand or all hell will break loose temporarily until they come up with a permanent and workable solution.  I believe it is more of the former than the latter. 

As such, speculation and aggressive growth investment plays are not the investment strategy du jour.  Moderation and investment in good, sound companies that are either are paying dividends and/or can be acquired at very reasonable prices is much more attractive than focusing on the speculative stocks in say China or Russia or an Internet startup that may be the next Google.  

Bottom line, I want fund managers and investment opportunities that match up with my car philosophy.   I don’t want an ultra safe, defensive, gas guzzling Hummer that can crush anything that gets in its way.  Nor  do I want a high-end sports car that goes 0-60 in 3.5 seconds, is unreliable and costs a fortune to repair.  No, I want a four-door sedan with modest options that can get me safely from point A to point B and is very economical and reliable.     

Quotes 

“No man ever achieved worthwhile success who did not, at one time or other, find himself with at least one foot hanging well over the brink of failure.”

                        Napoleon Hill, motivational author 

“I’d like to live as a poor man with lots of money.”

                        Pablo Picasso, artist 

” Our fatigue is often caused not by work, but by worry, frustration and resentment.”

                        Dale Carnegie,

Tony Moeller, CPA
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets.  

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

Europe continues to be a mess and the Greeks are in fantasy land.  The situation is analogous to the Greek government’s boat capsizing at sea, and an EU cruise liner coming by offering to save the passengers who are trending water to stay afloat.  However, the Greek passengers decline the offer to be saved, because the EU cruise liner is not luxurious enough for them.  Greece is bankrupt, causing huge financial losses for some investors, and is in no position to make any demands in my opinion. 

Another example of the problems in Europe is the Dutch financial services group ING announcing yesterday that it will cut 2,700 jobs, which represents 10% of its European retail banking operations, due to deteriorating markets.  This is similar to what ING rivals ABN AMRO and Rabobank have done.  These foreign banks are inefficient compared with their foreign rivals and need to cut costs to remain competitive.  In addition, ING has been directly impacted by Greece as it had to take a $467 million-euro pre-tax write-down on Greek government bonds in its third-quarter results.    

MF Global 

Halloween may be over, but it is still scary out there.   MF Global was a large brokerage firm run by Jon Corizine, who previously was the CEO of Goldman Sachs and the Governor of New Jersey.  In addition, this firm, MF Global, due to its multiple and far-flung business practices had no fewer than five U.S. regulators who either oversaw or were interested in its actions, as well as other international exchanges and regulators.   

It is almost unfathomable that a firm ran by someone as knowledgeable, experienced and respected as Mr. Corizine is on course to become the eighth largest bankruptcy in U.S. history.  Adding insult to injury are allegations of $700 million of MF Global client money missing and illegal activities taking place.  The facts are still coming out; however, it appears that Mr. Corizine steered MF Global to make huge bets on the sovereign debt of Portugal, Ireland, Italy, Greece, and Spain (better known as PIIGS).  I believe in one article it was noted that MF Global had borrowed at a rate of 40:1 (loans vs. assets).  When these bets went wrong MF Global could not cover the losses, and it is alleged that the firm broke the industry rule of never mixing client funds with the firm’s funds; they must always be kept separate.  

Ironically, Moody’s downgraded MF Global last week, but Mr. Corizine publically minimized / downplayed the downgrade.  Investors thought they had their money securely tucked away in a credible investment house. This week they awoke to their own nightmare to discover that their money was locked away in a house of horrors. 

If, and I emphasize if, these accusations of wrongdoing prove true, then it is another example of a Wall Street insider who flaunted the rules, took excessive risk and was willing to put his clients’ money in jeopardy to try and save his own skin.  Otherwise, as Ricky used say to Lucy, “you’ve got a lot of explaining to do.” 

To put your mind at ease, TD Ameritrade is the discount brokerage that I use in managing client funds.  In addition, neither I, nor clients, are using borrowed money to invest.  Secondly, TD Ameritrade does not actively trade for its own benefit/profits nor takes risks similar to what MF Global did.  I find it ironic that a firm like TD Amertirade, headquartered in Omaha, NE, is a much more stable and endearing business than many of its flashy Wall Street competitors. 

Ben Bernanke 

The Federal Reserve Chairman made it clear that he is ready to do whatever is necessary to boost the economy via Fed policy.  This is based upon the Fed releasing 2014 projections, which showed joblessness at 6.8% to 7.7%, and economic growth in 2012 likely to come in between 2.5% to 2.9%, a far cry from the 3.3% to 3.7% expected in June. 

It appears that Mr. Bernanke believes inflation is not an issue and is willing to keep short-term interest rates near zero until mid-2013.  He may be holding tight on any additional economic stimulus efforts until he sees the stock market swoon again. 

European Central Bank (ECB) 

The European Central Bank got a new President, Mario Draghi, this week and he instituted an interest rate cut within of a quarter of a percent to help protect the euro zone from dipping into recession.  Mr. Draghi and the ECB have the same opinion as Mr. Bernanke that inflation will be tame in the near future.  

I feel like I missed the boat 

The U.S. and global stock markets have rebounded over the last several weeks and yesterday reacted positively to Mr. Bernanke’s pledge to help the U.S. economy in his role and the ECB rate cut.  In addition, corporate profits have been good.  In spite of this good news, I have been reluctant to put new money to work based for the following reasons: the insanity taking place in Europe (especially Greece), economic slowdown in Europe and various other countries, and the risk that the U.S. Debt Super Committee struggling to come up with a budget plan that makes sense and will be implemented so as to stave off a government shut down in the upcoming weeks. 

Maybe I am too pessimistic and consumer confidence is declining for all the wrong reasons.  I am consistently reading and talking with various investment and industry professionals to get a better grasp of where the economy and stock market are headed. Please note, I am not a market timer, nor am I representing to be one, but I believe that we may have another couple of drops in the market roller coaster before we see a long-term upward trend that eventually breaks out of the current trading range that we’ve seen this year. 

Points to Ponder! 

“Strategists say companies seem comfortable returning profits to shareholders because of stronger-than-expected earnings and all the cash on their balance sheets. S&P 500 companies are sitting on $1.13 trillion in cash and short-term investments—two thirds more than they had heading into the recession in 2007, according to Capital IQ.”

 Paul Kim, The New York Times, August 20, 2011 

“If investing was just all history, the historians would be billionaires.  Same with quant and algorithms.  High quality stocks in the US and the emerging markets are the place to be, and this panic is a wonderful opportunity to buy them.”

Barton Biggs, Macroeconomic Thoughts, August 16, 2011 

“Today the aggregate dividends paid by the nonfinancial sectors are about 20% higher than they were at the 2007 peak.  Furthermore, the dividends of financial firms today comprise only 16% of the total dividends paid, less than half their proportion in 2007. In other words, another financial crisis

cannot have the same impact on either the earnings or dividends of the U.S. equity markets. Finally, dividend growth in the last two years has averaged over 10% per year, more than twice the

long-term dividend growth rate, as firms rightly begin to return their record cash balances to shareholders.”

Jeremy Siegel, The Wall Street Journal, August 22, 2011 

“Confidence bear markets are almost as bad as the real economic thing.”

Chin Wang, Leuthold Weeden Perception for the Professional, September 2011 

“Over the next decade stocks are likely to generate an average annual return, including dividends, of around 7%. Your money will double in 10 years. How bad is that? People ought to get over the illusion [of higher expectations] and realize that they may have to invest for longer time periods, start earlier and save more.”

John Bogle, The Wall Street Journal, September 10, 2011 

“Like Japan in the 1990s, the United States is experiencing what economist Richard Koo calls a ‘balance-sheet recession,’ a sustained period of deleveraging that will contract the economy without fiscal stimulus. But the fundamental idea of deficit spending is that at some point the government can stop, returning to relative austerity and budget surpluses once the boom phase of the economic cycle returns.”

James Pach, The Diplomat, August 17, 2011

Quotes 

“With self-discipline most anything is possible.”

Theodore Roosevelt, 26^th U.S. President 

“Happiness is nothing more than good health and a bad memory.”

 Albert Schweitzer, theologian, philosopher, physician, and medical missionary

Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets.

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

Well, let’s take a quick history lesson.  Do you recognize the following quote?   “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights that among these are Life, Liberty and the pursuit of Happiness”

It is from the U.S. Bill of Rights.  

Let me begin by saying that I am not a history scholar; however, my quick interpretation is that the government perceives all men (individuals) to be created equal, and they have the right to life, liberty and the pursuit of happiness.  Even though we are all created equal, what we do with our talents and the resulting successes or failures may not be equal.  Most importantly, we are allowed to pursue happiness, but it is not promised nor guaranteed. 

Well at this point you may say, “What the heck does this have to do with my investments?”  It has a lot do with your investments.  You would not place a ladder on soft ground or pour a foundation on unstable / shifting soil.  As such, long-term economic expansion, lower unemployment and investment gains, as well as an improvement in individual’s personal and this nation’s finances will not occur until we see the problems associated with these protests realistically, painfully and permanently addressed. 

Bottom line, we all have free will, whether we choose to buy a $100,000 or $500,000 home; dependent upon someone lending us the funds.  In addition, if you are either attending or have attended college or universities, you are free to select your major and choose how much you want to spend or borrow to pay for your education. 

To date, I have yet to read or hear of a single instance where someone was forced to attend college or buy a home.  Now that being said, it doesn’t mean that some individuals weren’t ill-informed or uninformed, misled or persuaded by someone or an entity to borrow more money than they could reasonably pay back.  Free will can be a blessing or a curse depending on how you apply it.  Unfortunately, high intelligence and a firm ideology, if not balanced with basic economic knowledge and more importantly, common sense is a recipe for disaster. 

I am very empathetic to those individuals who’ve been adversely impacted by the economic events over the last several years, especially those individuals who’ve been laid off and are struggling to find new employment.  However, we are going down a very slippery and dangerous slope if we allow “moral hazard” to become the norm.  Demands of free tuition and student loan forgiveness may seem far-fetched; however, one agriculture student turned protestor stated at a recent rally that, “sometimes if you shoot for the moon, you’ll land in the stars.”  Well, reality is neither the United States, nor any other country on this globe can underwrite or bail out every individual and whatever bad choices they’ve made.  Yes, some banks and Wall Street firms were bailed out with TARP money, and I was not very pleased about it, but the vast majority of them have paid it back, along with interest.  In addition, many of them have and/ or are incurring other penalties and fines as well.  For goodness sakes, GM and Chrysler were bailed out, and I don’t see anyone protesting them.  The crisis occurring in Greece and with the European sovereign debt and the impact on the banking system is an example of what happens when you embrace “moral hazard” over time.  Do we really want to follow their lead? 

As it relates to the current economic mess we are in, do I believe that corporations, financial institutions and politicians need to be held accountable and punished if they broke the law?  Yes!  However, to blanketly label all corporations or successful individuals as greedy and want to punish them is misguided.  By doing so you are redistributing or actually taking money from those individuals who: 

• Have been responsible and worked hard, paid all their debts on a timely basis, lived below their means and even sacrificed lifestyle choices to set money aside for emergencies, and/ or their retirement; 
• Or individuals who’ve taken risk to create a product or business, and if successful, hired employees to grow the business. 

It would be no different than penalizing Apple for the success of its i-Phone and i-Pad and redistributing a portion of their profits to their competitors, or handicapping Michael Jordan or Tiger Woods so as to make it a more even playing field for their opponents.  By doing so, all innovation and progress will cease because we’ve chosen to penalize success and subsidize or reward failure and mediocrity. 

It may be a dysfunctional economy, but companies are sharing the profits

I read recently that the 30 stocks making up the Dow Jones Industrial Average are expected to increase their annual dividend payouts by an average of 11.8% over the third quarter of 2010 and by 1.1% over the second quarter of this year.  This is a very positive sign that these companies are not only sharing the profits with their shareholders, but they are confident enough in their business prospects to commit to paying higher dividends going forward. 

Another positive economic note is that 20% of the S&P 500 companies have reported third quarter earnings, and of that group, 70% of them exceeded expectations and only 10% have disappointed.  Overall, businesses have weathered the last recession and adapted very well. 

Trust broken 

Citigroup Inc. has agreed to pay $285 million to settle federal allegations that its broker-dealer subsidiary misled investors about a complex $1 billion mortgage investment that the company was secretly betting would fail. 

Citigroup sold investors a collateralized debt obligation (CDO) that was tied to the U.S. housing market and when it defaulted in November 2007, they were left with a worthless investment.  However, Citigroup made $160 million in fees and trading profits earned through a $500 million short position (making a bet that the investment they just sold investors would go bad) in the specific group of assets that it had selected for the underlying investment, according to the SEC complaint filed in U.S. District Court for the Southern District of New York. 

On Feb. 28, 2007, the day the transaction closed, an experienced CDO trader wrote in an e-mail that the portfolio was “dogsh*t” and “possibly the best short EVER!” the SEC said in its complaint. Another experienced investment manager said, “The portfolio is horrible,” the SEC said.

“Investors were not informed that Citigroup had decided to bet against them and had helped choose the assets that would determine who won or lost,” said Robert Khuzami, director of the SEC’s enforcement division. 

The agreement marks the latest in a string of SEC cases related to complex financial products tied to subprime mortgages that imploded as the housing market declined in 2007 and 2008.  One investment professional, who played a major role in this scandal, received only a six-month suspension from the industry. 

Talk about getting off with only a slap on the wrist!  It is one thing to make a recommendation and it does perform as expected; however, it is a completely different scenario to give advice or sell a product to a client and then turn around and bet against it.  Though security regulators allowed this to occur, in my opinion it is immoral and arrogant.  This is one example of why full service or commission –oriented brokerage firms are waging a fierce fight to not be held as fiduciaries of investors’ money like fee-only registered investment advisors currently are.  This is a whole other can of worms that I am not going to dive into today. 

Misguided frustration 

Is there personal and corporate greed?  Yes, and I don’t believe it can ever be eliminated.  However, just consider this.  Bloomberg news reported yesterday that calculations from data provided by the U.S. Commerce Department show that the richest area in the United States is not Wall Street, Silicon Valley or Beverly Hills.  No, according U.S. Census Bureau figures the typical household income in the Washington D.C. metro area tops them all. 

Bottom line, Federal employees, high-priced lobbyists, contractors, consultants have combined to make DC one the most highly compensated, economically stable and priciest real estate areas of the country.  Now I am sure, some of you will think I am trying to be snarky; however, these stats are all provided by the U.S. government. 

As such, it is a fact that Wall Street bankers, the Federal Reserve and various politicians and their targeted legislation / policies all played a part in the current economic mess we are in; however, I see very few if any reporters or protestors talking about the exponential expansion of power and wealth and concentration thereof that taken in D.C. over the decades. 

Bob said it best! 

Bob Rodriguez is a highly successful and well respected, veteran fund manager who tells it like it is.  He blames Bernanke, Congress and consumers in an interview published on October 20, 2011 in AdvisorOne. 

Bernanke: 

He believes that Mr. Bernanke has been well-intentioned, but his view of the world is and has been incorrect.  While he’s been trying to improve the situation, he’s really harming it.  The following is the analogy he gives regarding the consequences of Mr. Bernanke’s actions. 

“We have this economic car going down the road:  on one side is fiscal policy pressing on the gas pedal.  At the same time, the Fed is putting their foot on the brake thinking they’re stimulating the economy with their zero interest rate policy.  But they’re hitting savings big-time, which is acting as a detriment to consumption.” 

Congress: 

He believes that there is continued political incompetence with regard to fiscal issues.  Also, the U.S. is in need of a fundamental, structural budgetary reform in the Congress, but he doesn’t trust them to do it.  “Why should we trust a Congress that has a 13% [Gallup Poll] approval rating with our budgetary future?” he noted in the article. 

Consumers: 

“I’m very sick and tired of the class warfare card being played.  It’s divisive.  Obviously, frustration is building.  But between 2000 and 2007, the consumer levered (i.e., borrowed more money) up like he had never levered up in U.S. history.  More debt was added in those seven years than in the preceding 40 combined.  [But] there’s plenty of blame to go around.” 

Does Mr. Rodriguez see any hopeful signs? 

“Some positive things are percolating-emanating from various states.  It’s reflecting that the American public is starting to wake up.  The problem at the fiscal level can be addressed by our representative.  It takes only one thing:  Does the public have the courage to realize that we must go through some painful process for the benefit of our children and our children’s children?  If we don’t go through these, I fear we will be looking at another generation of declining living standards.” 

Personally, I believe Mr. Rodriquez is spot on and politically neutral in his analysis. 

Let’s be civil! 

I just have to say it.  The antics of some of the rioters and protestors overseas and the U.S. are deplorable to say the least.  However, I saw a few snippets from the recent republican presidential debate and could not believe the lack of decorum or manners that some of these individuals exhibited on national TV.  Look, if you want to be President of the United States of America, then show some respect and at least like act like an adult.  I don’t know about you, but I vote on a candidate based upon his or her characteristics, not on how well they try to make their opponent look bad or how loud or often they interrupt them.  Unfortunately, it appears the recent debate is a reflection of the lack of class or manners our society is experiencing. 

Quotes 

“Success is a ladder that cannot be climbed with your hands in your pockets.”

                        American proverb 

“Resisting adversity causes some men to break, others to break records.”

                        Author unknown 

“Experience tells you what to do; confidence allows you to do it.”

                        Stan Smith, tennis pro 

“Envy comes from people’s ignorance, or lack of belief in, their own gifts.”

                        Jean Vanier, philosopher and humanitarian 

“Witnessing the Republicans and the Democrats bicker over the U.S. debt is like watching two drunks argue over a bar bill on the Titanic.”

                        Excerpt from an editorial in the Kentucky Statesmen

 Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets. 

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

Mr. Jobs may not have been an ideal boss or very tactful; however, he was a visionary who created hundreds of thousands of jobs and billions of dollars of profits for investors from a whole host of i-products.  Mr. Jobs and Apple will forever be intertwined, and ironically all this success was the result of a strong and determined leader of a very cohesive team, whose most successful products all begin with i.  Any of you who played sports have heard the old adage, “there is no I in TEAM,” well Mr. Jobs proved that wrong.  Even though I don’t own any Apple products, I feel saddened for the loss of a visionary like Mr. Jobs.  I sincerely hope that somewhere out there are individuals who have been inspired by what he has done and take the risk and follow his “outside the box” thinking in areas that may benefit our lives. 

It’s a global economy and Europe is in the driver’s seat  

Like it or not, we have a global financial system and currently Europe is in the driver’s seat.  Specifically, Greece (a member of the European Union) is behind the wheel and driving at high speeds under the influence of overspending and excessive debt.   The more responsible EU members, such as Germany and France, are trying to wrestle control of the steering wheel without causing a major financial wreck from Greece defaulting on its debts.  Unfortunately, finding some sort of viable solution is still elusive and the uncertainty is hammering stock markets around the globe.  

For example, I recently heard a commentator on CNBC state that investors are not allowed to short European bank stocks (i.e., make market bets that their stocks will go down).  As a result, some institutional investors are shorting U.S. bank stocks.  Their intent is to profit from U.S. bank stocks being drug down in price from the worries about European banks’ problems possibly impacting them.  As such this could be the case where U.S. bank/financial stocks are being hammered for their unrelated, overseas brethren’s sins.  

Additionally, it does not help that we have politicians here at home chastising some of our largest banks, and actually advising depositors to pull their accounts.  Look, some U.S. banks and Wall Street firms were irresponsible and had a hand in the current economic mess we’re in, but many of the policies that politicians pushed through in the last several decades played a role as well.  Unfortunately, no ex or current CEOs at these large institutions or politicians will be punished for their actions, because at the time they both knew what was occurring and either chose to ignore it, since everyone else was doing it and/or it was mutually beneficial for all involved.    

As it relates to the current civil unrest we have seen in Europe and now in the U.S., Jeffrey Gundlach, the founder and chief investment officer of DoubleLine Capital and a very successful bond fund manager was speaking at a luncheon last week in New York and he stated, “One of my highest themes in investing is that bull markets are about cooperation; bear markets are about divisiveness.”  Unfortunately, protests and divisiveness are considered trendy currently.  

History has shown time and time again that cooperation, hard work and coming together for a common cause is what creates great economies, companies and championship teams.  Just look at what occurred in the United States after World War II; what Apple has achieved in the last decade and how the athletes interact on any collegiate or professional championship team.  In all three examples, the citizens, employees and teammates all worked together, move forward and or pull in the same direction.  

However, this is not at all what we see occurring around the globe and particularly in the U.S., and the negative and unproductive rhetoric is only getting louder.  Honestly, it’s like a married couple arguing on their front lawn about who left the stove on while watching their house burn, versus calling the fire department and grabbing a hose in the meantime. 

Bottom line, we are experiencing class warfare between borrowers and investors.  For example, I recently refinanced my mortgage and locked in at 3.375% for 15 years.  On the other hand, I saw an advertisement for a 2.50% five-year CD.  Thus, borrowers and younger individuals buying a home or refinancing their mortgages are saving thousands and thousands of dollars over the years, but retirees can’t rely upon the old tried and true bank deposits or CDs to fund their lifestyles.  

However, these same retirees are receiving social security and/or pensions as promised.  Whereas younger works, say anyone under 50, should be prepared to see whatever promises made to them either via social security or a pension, probably not come to fruition.  I am not saying that they won’t receive anything; they just won’t receive what they were originally promised.  Things have been overpromised, underfunded, mismanaged or combination of all three.  Any way you look at it, ultimately, we as individuals will be asked to take on more responsibility for our financial security via personal savings, 401(k)s, IRAs, etc.  

Income only versus growth and income (i.e. total return) 

I have spoken with several other investment professionals, and they are just as frustrated as me by the last several months and the decline in portfolio values.  These advisors noted that their investment strategy has been diversification between stocks and bonds, with the intent of covering some of the retirees income needs from income generated from interest and dividends and the remainder from the capital appreciation of seeing their investments appreciate.  Historically, this has worked well; however, in extended bear markets this does not work so well. 

As a result, many retirees are being forced to focus primarily or solely on investments that are income-oriented (bonds, convertible bonds, preferred stocks and dividend paying stocks) and give up on capital appreciation as an offset to inflation.  Even though I believe at some point in the future we will see some nice market gains, in the meantime some retirees may need to forgo future gains and a total return investment strategy in lieu of a steady income stream in the near term.    

There is some good news 

Even though I don’t believe we may see a real improvement in the economy and stock market until sometime in 2012, the following are positive signs for investors: 

• The valuation in the equity markets is as low as it was in the first quarter of 2009 (the bottom of the last bear market).
• Interest rates in the Treasury market are closing in on lows we saw in 2008.  Many of you remember that December 16, 2008 was the date we saw the highs in Treasury prices.
• We are seeing a very large spike in insider buying, which is more closely associated with a market bottom.
• Investor sentiment is clearly negative with liquidations in equity funds that rival those seen in early 2009.  Cash hoards are at record levels.  Both of which are can be preludes to a market recovery.
• The Fed has been working overtime dumping massive amounts of stimulus into the U.S. economy. 

In addition to the above items, I recently heard a chief investment officer of a large investment firm note that over 700 of the S&P 1500 (not 500) are growing earnings by over 10% per year.  Also, U.S. corporations have over $2 trillion dollars of cash on hand and are much more efficient today than prior to the last economic downturn.  If global governments had made tough choices, improved their operations and financial structures to the extent that public corporations have over the last several years (for argument sakes, let’s exclude all the financial firms that received TARP money or were bailed out), then we would be in the midst of a vibrant and global economic recovery.  Employment and retirement account balances would both be increasing and the vast, vast majority of us would be benefiting and happy.    

Quotes from Mark Skousen, American economist, investment analyst, newsletter editor, college professor and author:

“History repeats itself, but never in the same way.” 

“Leverage is like shooting an arrow into the sky.  Eventually it comes down to earth.” 

“You can judge a man by the books in his library.” 

“My generation made a mess of things, now it’s your turn.” (To his children, 2010)

Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets.  

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

There are pros and cons as countries around the globe become more economically aligned; however, we are currently seeing the cons.  As the EU struggles with sovereign debt flu, the U.S. is starting to catch an economic cold.  As I noted before, no one knows for sure how this will turn out, and we may find some short-term relief as the EU tries various monetary medicines, but I believe any true solution will be tough and take years to get its sickliest of members healthy again.    

One small bright spot in all of this, if you can call it that, is that all this global economic uncertainty is resulting in lower energy prices.  A weakened global economy drives energy prices lower and the lack of certainty about Europe has been pressuring the energy sector.  Europe consumes about 18% of all crude produced globally.  Domestically, natural gas and heating oil prices have dropped recently due to concerns of a decline of consumer confidence and a potentially stagnant economy.  At least consumers will find some cost savings in light of the current economic issues at hand. 

Whose opinion will be right? 

Last week the Organization for Economic Cooperation and Development (OCED) announced that it sees a global economic slowdown in the year head.  The OCED is an international economic organization of 34 countries founded in 1961 to stimulate economic progress and world trade.   

On the flip side of the coin, the CEOs of UPS and GE both noted that they continue to see positive economic growth signs throughout the world.  The CEO of UPS did note that U.S. momentum has basically stalled, but he believes that gross domestic product will return to normal growth starting in 2013.  Since UPS and GE have large global presences, it is insightful to get their perspective. 

Based upon the two differing economic opinions, hopefully 2012 is only a year of economic pause and sets the stage for better economic growth in 2013 and not a double dip recession.  

Emotional volatility trumps market volatility 

Successful investors have the ability to think rationally and act knowledgeably even during times of extreme economic and market volatility.  However, market volatility often isn’t the toughest challenge; it’s emotional volatility. 

Even small fluctuations in the markets can generate intense emotional reactions.  Behavioral finance has shown that all investors, no matter how dispassionate or rational, are affected by volatility because of common, hard-wired vulnerabilities.  Volatility activates the fight-or-flight instinct in investors. 

Of course, not all volatility is negative.  We love to watch our investments increase in value.  But when a portfolio trends downward, several mechanisms get activated within our brains.  Even small losses feel painful (researchers call this “loss aversion”), and it feels as if downward trends will continue forever (known as “inappropriate extrapolation”). 

If we expect that there will be more painful losses, fear kicks in and sparks an impulse to flee.  This is an important, because it’s not the pain of realized losses that stimulates impulsiveness; it is the fear of additional losses. 

Our mind doesn’t become anxious about past events; oh we may feel sad, angry, guilty or regretful about past experiences, but not anxious.   We are anxious about anticipated losses.  At this point, we make impulsive decisions about an investment and aren’t thinking about what we’ve already lost.  We focus on what we perceive are the losses that are yet to come.

This is why we may not think clearly and can’t respond to a rational argument.  A brain that has been activated by fear is taken over by instinct, turns off rational thinking patterns and can’t hear or process information.   As a result, concepts such as the tendency of the markets to regress to a mean, or the merits of a buy-and-hold strategy seem nonsensical when we are caught up in market volatility and our natural fight-or-flight instincts takeover. 

As such, an effective response is to attempt to deactivate the primitive fight-or-flight instincts and reactivating the rational parts of the brain.  To do this we need to ask ourselves questions about the future: “What do you think is going to happen?”  Faced with this question, our brain is forced to shift gears and to activate its rational thinking and language portion.  After spending some time answering the first question, then we can then ask ourselves “How is this going to happen?” 

This second question should help us increase our rational thinking and further deactivate the fight-or-flight instinct, which can help us mitigate the fears of imaginary future losses.  As the rational centers of the brain engage more, we become more resourceful, more able to think strategically and more inclined to embrace rational, long-term investment strategies that met our objectives prior to a period of extreme market volatility. 

Primitive instincts are natural and were crucial to humans’ ability to survive.  That being said, rational thinking, especially when it comes to investment decisions in times of market volatility or crisis, is not nearly as developed or powerful as our fight-or-flight instinct.  As a result, it is the major reason investors flee during what appears to be troubled or threatening times and incur substantial losses versus long-term gains.   

An example of two optimistic equity investors 

Up first, Mr. John Bogle, the 82 year-old founder of Vanguard Mutual Fund Group.   

With economic growth at a standstill, Europe a financial disaster area, and the U.S. stock market tanking, buy and hold seems to be about as popular poison ivy. 

However, this past week columnist, Jason Zweig of the Wall Street Journal interviewed Mr. John  Bogle who founded the Vanguard Group in 1974.  Mr. Bogle is experienced investor and has some strong opinions about the investment industry and has been called sanctimonious by his critics.   However, his forecasts of stock and bond returns have been more accurate than most.  In the early 1990s, he called for double-digit annual percentage gains for stocks over the coming decade, and he was correct.   In 1999, Mr. Bogle believed the next decade would bring low-single-digit returns for the next decade, and he was right again. 

Even though Mr. Bogle is frustrated at governments around the world for bungling financial policy, and at speculators for, in his opinion, hijacking the markets, he is optimistic that future stock returns will be better than many expect.  He is of the mindset that buy-and-hold investing works and stated that, “diversification is not only the first important thing investors should think about, but the second and the third, and probably the fourth and fifth, too.”  He believes the buy-and-hold philosophy works when applied not just to stocks but across an entire portfolio, including bonds and other assets. 

Mr. Bogle believes that indexing (i.e., the automated strategy of buying all the securities in a market benchmark) has gotten out of hand.  He noted that there has been a proliferation of exchange-traded funds.  Unfortunately, many of which are narrowly focused and some use leverage to multiply a market’s return, which dramatically increases.  Mr. Bogle’s opinion is that ETFs often “are just great big gambling, speculative instruments that have definitely destabilized the market.” 

Ironically, Mr. Bogle admitted that he was almost bitten by the gold bug recently, but has declined buying any since “gold has no internal rate of return” and is “the ultimate speculative investment.   He noted in the article that “Of course, I’m assuming there will be no apocalypse.  And that’s almost always, if not quite always, a good assumption.” 

Up next, Richard Sylla, economic historian and professor of economics at New York University’s Stern School of Business 

As stocks plunged last week, investors focused on the risk of recession and another market collapse.  However, Professor Sylla sees something very different over the longer term: the much-longer term, which he noted in his recent interview with E.S. Browning of the Wall Street Journal (WSJ).  The following are excerpts from that article. 

Prof. Sylla has been studying market behavior going back to 1790.  Through analyzing patterns detected years ago with two colleagues, he precisely predicted in 2000 the decade of overall declines that haunted investors. 

Prof. Sylla’s new forecast, if past market patterns hold true as they did in the last decade, is that stocks should bottom out during the next few years and begin a recovery. 

“People ought to take a longer view and think in terms of years and even decades,” Prof. Sylla says. “Most people are quite pessimistic right now.  I am saying: The market may go down from here.  It may go up.  But if you look at the long sweep of history, this seems like a good time to buy because the average return is down near the bottom” and is likely to go up. 

If the market follows its long-term pattern, Prof. Sylla says, the Dow Jones Industrial Average could climb to 20,250 by the end of 2020, up 84% from today.  The Standard & Poor’s 500-stock index might hit 2300, up 99% from Friday’s close of 1154.23. 

Prof. Sylla noted that he isn’t trying to predict short-term behavior.  Bottom line, he doesn’t know whether stocks will be higher or lower by year end, and he isn’t losing sleep over Greece, the sputtering U.S. economy or other problems now haunting stocks. 

Using 10-year averages of annual market returns, including dividends and adjusted for inflation, Prof. Sylla and his colleagues found that U.S. stocks have risen and fallen in surprisingly consistent waves for more than 200 years.  The pattern has become even steadier since World War II.

When 10-year-average annual returns dip below 5% and especially when they turn negative, as they did in 2008 and 2009, markets tend to bottom out and begin a recovery, the figures show.  Years later, returns top out as investors get overconfident, with average returns above 15%.  The market patterns might be related to swings of economic performance and investor confidence.  In 2000, when returns were at the high end of his range, Prof. Sylla found that a decade of zero average annual returns would fit the past trend.  He was right, and stocks suffered.  Now a recovery with 6.5% average annual returns, equal to the historical inflation-adjusted average, would fit, he says.  He isn’t saying stocks will rise that much each year, just that this could be the average. 

Prof. Sylla does see a 25% chance that the next decade could fall well short of that.  Japan suffered meager stock returns for more than 20 years after its real-estate and stock bubbles burst in 1990. Still, “my guess is that even if we had a couple more years of bouncing around, 2013 to 2022 would be much better,” he says.  Investors with long time horizons should focus on where stocks could be in 10, 20 or even 30 years, Prof. Sylla says.  That doesn’t mean they should buy stocks to the exclusion of all else, just that they shouldn’t give up on them. 

“There is a lot of excessive short-term thinking about the stock market: ‘What did [Federal Reserve Chairman Ben] Bernanke say today?’” he says.  ”In the 1980s, it looked terrible with those low returns, but I always tell my students that wasn’t such a bad time to buy stocks.”  Prof. Sylla based his work on the S&P 500, for which data have been estimated back to 1871, as well as calculations he did with his two colleagues for the period from 1790 to 1860, and the work of Bryan Taylor of Global Financial Data for the intervening period. 

Prof. Richard Sylla, says he believes the U.S. “is going to recover and go on to prosperity again as it always has.”  Of course, stocks could lurch higher and lower in the short run.  And things could get worse before they get better.  Prof. Sylla says the current period resembles a downturn period in the late 19th century. 

“We may not be able to get enlightened government policies until things get worse than they are now, which isn’t a happy thought,” he says.  But in the longer run, “I think the country is going to recover and go on to prosperity again as it always has.” 

Quotes 

“If you want to live twice as long, eat half as much, drink water three times as much, and laugh four times as much.”

                        John H. Cable 

“The purpose of a good negotiation is not how to divide the remaining slice of pie.  The purpose is to make more pies for everyone.”

                        Gerald L. Nierenberg, attorney and author 

“Success is not a doorway; it’s a staircase.”

                        Dottie Walters, motivational speaker, author and consultant

Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets.

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